Walgreen Co. (WAG), the largest U.S. drugstore chain, Monday reported a 20 percent increase in quarterly profit, helped by rising prescription demand and growth of digital photo printing (search).

The better-than-expected results sent shares of Walgreen up 4 percent on the New York Stock Exchange.

Walgreen has been helped by the growth of more profitable generic drugs and heavy investment in on-site digital photo processing.

Like other drugstore owners, Walgreen benefits from the aging of America's baby boomers, who buy more prescription drugs, analysts said. Walgreen, which has also been aggressively opening new stores, said Monday it is on track to add 365 stores in the current financial year. The company has 4,805 stores.

Net income rose to $411.0 million, or 40 cents a share, in the fiscal third-quarter ended May 31 from $342.3 million, or 33 cents a share, a year earlier.

According to Reuters Estimates, analysts had expected a profit of 38 cents a share.

Sales rose 13.1 percent to $10.83 billion. Analysts on average forecast $10.88 billion, according to Reuters Estimates.

Sales at stores open at least a year, a key measure of a retailer's performance, rose 8.7 percent.

Walgreen filled 8.8 percent more prescriptions at stores open at least a year, helped by a later flu season, the company said.

But analysts are cautious about recommending Walgreen stock, saying that it is fairly valued at about 26 times fiscal 2006 earnings estimates.

"Stiff competition and potential cannibalization from new stores continue to put additional risk in this stock," Charles Georgas, analyst at Marquis Investment Research, said in a note. He has a "neutral" rating on the stock.

Walgreen shares were up $1.66 at $46.04 on Monday on the New York Stock Exchange (search).